Following closely on the heels of Massachusetts Democratic Sen. Elizabeth Warren’s recent proposal to subsidize student loans through the Federal Reserve, another senator is taking aim at student loan debt with a bill that would give a borrowers a huge break but leave taxpayers scrambling to make up the difference.
New York Democratic Sen. Kirsten Gillibrand introduced a bill this week that requires the Secretary of Education to offer borrowers the chance to refinance their loans at a flat interest rate of 4 percent. This would lower the debt obligations of 9 out of 10 borrowers, according to The Huffington Post.
“At a time when corporations, homeowners and even local governments are refinancing at historically low interest rates and saving millions of dollars, students and families who take out loans to pay for college are getting left behind,” said Gillibrand in a statement. “Ensuring that our graduates are not saddled with unmanageable debt by keeping interest rates low is just common sense.”
Such a break for students and graduates would come at a tremendous cost to taxpayers, however, since the current, higher interest rates generate a massive profit for the government. If rates are left unchanged, the Department of Education will make $51 billion off of student loans in the coming year.
Gillibrand’s legislation would also cut into the profits of Sallie Mae, a lending firm.
The senator has asked the Congressional Budget Office to calculate the cost of the bill to taxpayers before she proposes a way to pay for it.
Interest rates on student loans are currently set by Congressional order. Warren is sponsoring a bill that would set interest rates at .75 percent for one year, paying the difference via a direct subsidy from the Federal Reserve. Her thinking is that college students deserve the same treatment as big banks that are able to borrow money from the Fed at extremely low interest rates.
But college students are much more likely to default on their debt, making them a less trustworthy investment, said Alex Pollock, a fellow at the American Enterprise Institute.
“Going forward we will see in excess of 20 percent lifetime defaults, maybe 30 percent, and that’s even counting that the government rigs the rules so that when you measure defaults they make it very easy to get over the hurdle by giving various forgiveness and exemptions,” he said in an interview with The Daily Caller News Foundation.
A fair market loan rate should be based on careful analysis of risk factors like default and delinquency rates, not politics, he added.
“Until you do that there’s really no point in talking about this rate or that rate in my opinion,” Pollock said.
Forgiving some student loans is gradually becoming a policy goal of President Obama, who enjoyed the support of countless indebted college students in his successful presidential elections. Now these young people are increasingly pushing Democratic politicians to do something about their debts.
Obama’s own plan would increase enrollment in income-based repayment plans, which allow low-income workers to receive some debt forgiveness, according to The Wall Street Journal.
The average loan debt per graduate rose to $30,000 this year–double what it was 20 years ago — according to a recent analysis.
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